The United States will soon pass a foreboding milestone: $29 trillion in national debt. In 2021, the federal debt alone is projected to be 102% of the country’s GDP. Even more concerningly, that figure does not include the $1.9 trillion “American Rescue Plan” that President Biden signed into law earlier this year, nor the $1.2 trillion so-called “bipartisan infrastructure bill” or the $3.5 trillion reconciliation package currently being debated in Congress. The disastrous economic consequences of such runaway spending are clear, and Americans are already starting to feel the pain with runaway inflation and worker shortages. But despite how bleak the situation may currently seem, history suggests that there is a path forward that can lead the country out of this crisis.
The scope of the country’s current debt problem is truly historic. The only two times the debt-to-GDP ratio has exceeded its current level were in 1945 and 1946 (103.9% and 106.1% respectively) at the height of government spending as a result of World War II. Typically, a country incurs a large amount of debt during war time and works to pay it off during peace time.
But now we find ourselves facing historic debt without being involved in any major wars. Moreover, far from a tool to ensure our national security, the debt itself has become a major liability for our national security. As the amount of debt increases, so too does the percentage of the budget required to pay down the interest on that debt.
For example, every dollar spent on interest is one dollar not spent on military readiness. During the recent crisis over raising the debt ceiling, multiple former Secretaries of Defense signed a letter warning Congress that unless the ceiling was raised, there would be “catastrophic consequences for the Defense Department…and our position of leadership in the world.” What’s more, our chief adversary, China, owns more of the national debt than any other single country except Japan – a terrifying prospect as great power competition increasingly becomes more based around economic pressure rather than military intervention. And as situations in places like Greece and South Africa have shown in recent years, economic turmoil – which unmanageable debt usually creates – has a tendency to threaten domestic tranquility.
Fiscal mismanagement by politicians also needlessly threatens vital domestic programs. Prior to the pandemic, the U.S. Treasury issued a report in 2019 that was already warning that both Medicare and Social Security would go “bankrupt” (meaning they would pay less to beneficiaries than they promised) much earlier than previous estimates. Social Security is predicted to be insolvent by 2035, and Medicare by 2026.
Once again, this was the status quo even before COVID-19 and all the unprecedented spending it brought about. Today, the situation is even worse. Add to that the reality of rising inflation, supply chain issues, and a new CBO estimate that the annual economic growth rate is expected to fall to 1.8% over the next three decades after staying around 3.1% since 1951, and the outlook is not good.
So how can this be solved? At the moment, the radical Democrats in Washington are only interested in raising taxes and spending vast amounts of money. Democrats dubiously claim that their proposed tax increases would only target the very wealthy. But even if that were true, and most conventional wisdom suggests it’s not, their new taxes on businesses would further hamper economic growth and force companies to cut jobs, doing nothing to help an economy still struggling to recover from the pandemic-induced recession.
There is a better way – and our own legislative history proves that it can work. It was pioneered by Newt Gingrich and the “Contract with America” Republican Congress what won majority control of the U.S. House of Representatives in 1994.
When Newt Gingrich became the Speaker of the House in January 1995, the Congressional Budget Office (CBO) was predicting that by 2004, our national debt would equal 56.1% of GDP, and we were on track to accumulate nearly $3 trillion more debt over that same decade. The debt was expected to stay around 51-52% of GDP over the next 3-4 years, rising to 56.1% in ten years.
However, when Gingrich left office in January 1999 (just five years later), the CBO projected $2.3 trillion in surpluses over the next decade—a $5 trillion turnaround, what would be the equivalent of a $9.6 trillion turnaround in today’s dollars.
Likewise, by the end of Gingrich’s tenure, the ten-year CBO outlook was that the national debt would only be 12.2% of GDP, a staggering 80% improvement from where that same outlook had been when he took the Speaker’s gavel. Everyone expected the debt would be well over 50% of GDP by 1999, but under Gingrich’s leadership it had fallen to 39.4%.
Gingrich and Congressional Republicans accomplished this astonishing turnaround through simple pro-growth, fiscally prudent economic policies – many of the very same policies that brought about the economic resurgence of the Reagan and Trump years. Low taxes, controlled spending, and less government intervention in business resulted in 11 million new jobs, an unemployment rate that fell from 5.6% to 4.2%, and four balanced budgets in a row for the first time since the early 1950’s.
Thanks to the policies of that Republican Congress, the country also achieved bipartisan welfare reform, which decreased child poverty by 25%, and nearly two thirds of those who left welfare were gainfully employed. In addition, these policies helped further spur entrepreneurship and investment. Venture capital spending grew by 500% in just three years, and the manufacturing sector grew to nearly 17.5 million jobs. Instead of adding to our national debt, we paid off $400 billion of it.
The kicker? Gingrich and Congressional Republicans accomplished all of this with a Democrat in the White House. By negotiating tough deals with the Clinton administration, Gingrich was able to bring the country back from the brink of financial disaster. President Clinton is today largely remembered fondly by fiscal conservatives for declaring that “the era of big government is over” and thereafter presiding over four balanced budgets in a row and a growing economy. But it was Gingrich and the Contract with America Congress that created and passed the policies that catalyzed the country’s turnaround from a looming debt crisis.
It is true that the current fiscal situation in the United States is horrendous. However, with the midterm elections just over a year away, history suggests that there is reason for optimism. As in 1994, the American people once again have the opportunity to recognize the dangerous path being tread by Congressional Democrats and send a new Republican majority to Congress to make it right.